What factors cause inflation risk
Inflation risk is one of the important parameters that indicate the possibility of income depreciation. It shows the probability that the rate of inflation may be higher than previously predicted by economists. Inflation, in turn, shows an increase in the cost of goods and services, which negatively affects purchasing power and the value of money for the economy.
This type of risk is especially dangerous for the long-term investment sector, such as investments in bonds or stocks. If an investor bought securities at one price, and over several years the purchasing power of money decreased, then the investment will lose some of its value, and the yield will fall.
The main danger of inflation risk is that there is no way to avoid it. The loss of value of money occurs regardless of whether or not it is invested in an asset.However, there are several options for investors to minimize the damage from rising inflation. First and foremost, experts advise a thoughtful approach to forming one’s portfolio and diversifying one’s investments. To understand the seriousness of this risk for a particular case, you need to consider it from a short-term and long-term perspective. Although inflation is an inherent process in any economy, it is less damaging in the short term. It must take at least 1-2 years from the time of investment for an investor’s losses to become more tangible.
When investing for the long term, a different situation is observed. Various market factors affect money in one way or another. And if the funds lose their purchasing power, after some time they may rise again. Such a rise will stimulate an increase in the value of securities, which to some extent can compensate for the losses of the investor. However, this option is only possible with long-term investments.
One way to reduce the impact of inflation risks is to invest in a variety of commodities, such as metals, agricultural products, energy, and others. These commodities are necessary for the functioning of a large number of industrial sectors. Rising inflation stimulates an increase in the value of goods, which in this case is a win-win situation for the investor. However, experts warn that investing in raw materials has its risks: commodity markets are subject to liquidity. In addition, with inflation, one type of goods becomes more expensive while the other may become cheaper.
Inflation risks are caused by various factors, it can be deterioration of the economy or political difficulties. In addition, inflation can be caused by the population itself, which begins to actively invest in a certain type of goods, thereby increasing demand and prices for them. At the same time, people withdraw money from their accounts and spend less to buy other products, creating an imbalance in the economy.